Trump's victory in the 2024 USA presidential election helped Wall Street regain confidence in the US dollar.

What can be certain is that even before Trump's victory on November 5, the dollar had already begun to rise. Investors' anxiety about the possibility of a controversial outcome pushed up expectations of volatility indicators in the stock and bond markets. Ultimately, shortly after the end of the public opinion polls, Trump achieved victory, laying the foundation for the historic rebound in the stock market, the dollar, and the US government bond yields.

The US dollar generally strengthened, with the dollar rising the most against emerging market currencies such as the Mexican peso. People expected Trump's tariff policy to boost demand for the dollar (relative to other currencies), while tax cuts could widen the deficit and push up US government bond yields, leading to further appreciation of the dollar. Wall Street firmly believed in this, with many selling investment banks and research institutions predicting that the dollar would strengthen over the next year.

Corporate tax cuts and deregulation can also increase company profits, allowing the US economy to continue to expand at a pace faster than europe and japan. Historically, the strong US economy has always been favorable for the dollar compared to other regions in the world.

The dollar has now erased nearly all its declines since the third quarter, when the dollar plunged significantly due to expectations of aggressive interest rate cuts by the Federal Reserve.

Usually, the Federal Reserve's interest rate policy affects US bond yields, thereby influencing the forex market. However, Steve Englander, Global Head of G-10 Currency Research at Standard Chartered Bank, stated that this was not the case in October. According to his analysis, around 60% of last month's dollar rally was driven by Trump's positive momentum in the online gambling market.

Setting politics aside, the dollar is facing a hopeful economic backdrop. The US economy continues to grow rapidly, with a third-quarter GDP annualized growth rate of 2.8%.

According to the latest personal consumption and expenditure data, consumer spending remained strong in September. At the same time, inflation continues to make slow progress towards the Federal Reserve's 2% target.

In the past few months, some market-based indicators, such as the five-year breakeven inflation rate, suggest that a strong economy could keep price pressures at elevated levels. However, few expect another wave of inflation similar to the one that rocked the stock and bond markets in 2022.

This should encourage the Federal Reserve to continue lowering its policy rate target. With other conditions being equal, lower rates should weaken the US dollar. However, since the Fed initiated a rate cut cycle by reducing rates by 50 basis points in September, US bond yields have actually risen, and government bond yields may be more resilient compared to those of other countries.

Even if the Federal Reserve continues to cut rates, Wall Street at least expects the European Central Bank to act more quickly. In addition, despite the Bank of Japan's rate hikes, following the aggressive policy rate hike in late July after the global stock market crash, the Bank of Japan is expected to be more cautious in the future.

Political instability and economic weakness in Europe have led Wall Street to look at the favorable prospects for the US dollar against its biggest competitor, the euro.

Currency market experts from Capital Macro and JPMorgan shared in a report with MarketWatch on Monday that they expect the euro to depreciate to parity with the dollar by 2025 as the 'American exceptionalism' prevails.

Traders seem to agree. Positions monitored in the futures market by the Commodity Futures Trading Commission (CFTC) show traders continuing to increase their long bets on the dollar using futures contracts.

However, some warn that forex traders may be overly optimistic in betting on the swift implementation of the incoming Trump administration's policy agenda. In fact, if Trump acts more slowly in implementing his tariff agenda, a dollar pullback may be more likely in the near future.

"I believe there are more bilateral risks," said Inger Lina. "People expect Trump to fully address the tariff issue after taking office. If he fails to do so, or only uses tariffs as a bargaining chip, I think this will have a negative impact on the dollar."

Including Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania, some people believe that the so-called 'bond vigilantes' resistance may hinder some of the Republican's tax reduction agenda.

For Trump and Vice President-elect J.D. Vance, a weaker dollar could be good news. Both have expressed concerns that a persistently strong dollar would hinder American exporters' competitiveness in the global market.

This has led some to speculate that the new government may take extreme measures to weaken the dollar. One option is: seek multilateral agreements with competitor nations to intervene in weakening the dollar - some call it the 'Mar-a-Lago Agreement.'

They refer to something similar to the 'Plaza Agreement' of the mid-1980s, which saw the U.S. and several major allies agree to work to devalue the dollar. Whether the new government has the ambition or enough international goodwill to ensure such an agreement remains to be seen."

In any case, the team at Capital Economics points out that for much of the past decade, the dollar has remained strong relative to other currencies. Currently, it appears that the situation will remain unchanged during Trump's second term in office.

Editor/Rocky